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SALM > SEC Filings for SALM > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for SALEM COMMUNICATIONS CORP /DE/

Form 10-Q for SALEM COMMUNICATIONS CORP /DE/


8-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

GENERAL

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related notes included elsewhere in this report. Our Condensed Consolidated Financial Statements are not directly comparable from period to period due to acquisitions and dispositions of selected assets of radio stations and acquisitions of various Internet and publishing businesses. See Note 4 of our Condensed Consolidated Financial Statements for additional information.

Salem is a diversified multi-media company with integrated business operations covering radio broadcasting, content programming, publishing, and the Internet. Our programming is intended for audiences interested in Christian and family-themed content and conservative news talk.

We maintain a website at www.salem.cc. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports are available free of charge through our website as soon as reasonably practicable after those reports are electronically filed with or furnished to the Securities and Exchange Commission ("SEC"). Any information found on our website is not a part of, or incorporated by reference into, this or any other report of the company filed with, or furnished to, the SEC.

Broadcast Segment

Our foundational business is the ownership and operation of radio stations in large metropolitan markets. Our broadcasting business also includes Salem Radio Network® ("SRN"), SRN News Network ("SNN"), Salem Music Network ("SMN"), Solid Gospel Network ("SGN"), Salem Media Representatives ("SMR") and Vista Media Representatives ("VMR"). SRN, SNN, SMN and SGN are networks that produce and distribute programming, such as talk, news and music segments to radio stations throughout the United States, including Salem owned and operated stations. SMR and VMR sell commercial airtime to national advertisers on radio stations and networks that we own, as well as on independent radio station affiliates.

Our broadcast revenues are generated from the sale of local and national advertising time, the sale of local and national programming time, the sale of network programs, and locally sponsored events. Broadcast revenues are impacted by the program rates our radio stations charge, the level of broadcast airtime sold and by the advertising rates our radio stations and networks charge. The rates for block programming time are based upon our stations' ability to attract audiences that will support the program producers through contributions and purchases of their products. Advertising rates are based upon the demand for advertising time, which in turn is based on our stations and networks' ability to produce results for their advertisers. We do not subscribe to traditional audience measuring services for most of our radio stations. Instead, we have marketed ourselves to advertisers based upon the responsiveness of our audiences. In selected markets, we subscribe to Nielsen Audio, which develops quarterly reports to measure a radio station's audience share in the demographic groups targeted by advertisers. Each of our radio stations and our networks has a pre-determined level of time that they make available for block programming and/or advertising, which may vary at different times of the day.

Nielsen Audio has developed technology to collect data for its ratings service. The Portable People MeterTM ("PPM") is a small device that does not require active manipulation by the end user and is capable of automatically measuring radio, television, Internet, satellite radio and satellite television signals that are encoded for the service by the broadcaster. The PPM offers a number of advantages over the traditional diary ratings collection system including ease of use, more reliable ratings data and shorter time periods between when advertising runs and when audience listening or viewing habits can be reported. This service is already in a number of our markets and is scheduled to be introduced in more markets in the future. In markets where we subscribe to Nielsen Audio under the PPM, our ratings have been less consistent. PPM data can fluctuate when changes are made to the "panel" (a group of individuals holding PPM devices). As a result, all radio broadcast stations, including ours, are susceptible to some inconsistencies in ratings that may or may not accurately reflect the actual number of listeners at any given time.

As is typical in the radio broadcasting industry, our second and fourth quarter advertising revenue generally exceeds our first and third quarter advertising revenue. This seasonal fluctuation in advertising revenue corresponds with quarterly fluctuations in the retail advertising industry. Additionally, we experience increased demand for advertising time during election years for political advertisements. Quarterly revenue from the sale of block programming time does not tend to vary significantly because program rates are generally set annually and are recognized on a per program basis. We currently program 41 of our stations with our Christian Teaching and Talk format, which is long-form talk programming with Christian and family themes. We also program 27 News Talk stations, 12 Contemporary Christian Music stations, 10 Business format stations, and eight Spanish-language Christian Teaching and Talk stations. Our business format stations operate similar to our Christian Teaching and Talk format in that they also feature long form block programming, but with financial experts, business talk, and nationally recognized Bloomberg programming. Our remaining stations are programmed in various other formats including ethnic, country and oldies.


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Our cash flow is historically affected by a transitional period experienced by radio stations when, due to the nature of the radio station, our plans for the market and other circumstances, we find it beneficial to change its format. This transitional period is when we develop a radio station's listener and customer base. During this period, a station may generate negative or insignificant cash flow.

In the broadcasting industry, radio stations often utilize trade or barter agreements to exchange advertising time for goods or services in lieu of cash. In order to preserve the sale of our advertising time for cash, we generally enter into trade agreements only if the goods or services bartered to us will be used in our business. We have minimized our use of trade agreements and have generally sold most of our advertising time for cash. In 2013, we sold 97 % of our broadcast revenue for cash. Our general policy is not to preempt advertising paid for in cash with advertising paid for in trade.

The primary operating expenses incurred in the ownership and operation of our radio stations include: (i) employee salaries, commissions and related employee benefits and taxes, (ii) facility expenses such as rent and utilities,
(iii) marketing and promotional expenses, (iv) production and programming expenses, and (v) music license fees. In addition to these expenses, our network incurs programming costs and lease expenses for satellite communication facilities. We also incur and expect to continue to incur significant depreciation, amortization and interest expense as a result of completed and future acquisitions and existing and future borrowings.

Internet & e-commerce Segment

Internet and e-commerce has been a significant area of growth for Salem and continues to be a prime focus for our future development. Salem Web Network™ ("SWN") and our other Internet businesses provide Christian and conservative-themed content, audio and video streaming, and other resources digitally through the web. SWN's Internet portals include Christian content websites: OnePlace.com, Christianity.com, Crosswalk.com®, GodVine.com, Jesus.org and BibleStudyTools.com. Our conservative opinion websites include Townhall.com™ and HotAir.com. Townhall.com also operates Twitchy.com and as of January 10, 2014, HumanEvents.com and RedState.com. All of our digital content is accessible through our radio station websites that also promote local content of interest to our audiences throughout the United States.

Our Internet and e-commerce segment also operates church product websites including WorshipHouseMedia.com, SermonSpice.com and ChurchStaffing.com. We offer books, DVD's and editorial content developed by our on-air personalities through the Salem Consumer Products website. As of January 10, 2014, our Internet and e-commerce segment includes e-book sales through Regnery Publishing; Eagle Financial Publications distribution of digitally delivered newsletters featuring market analysis and investment advice; and Eagle Wellness, offering complementary health advice as well as nutritional products.

Our Internet and e-commerce revenues are generated from sales of digital advertising, streaming services, e-books, digital e-mail and newsletter subscriptions, product sales and royalties, consumer products including e-book sales, DVD's, and editorial materials created by our on-air hosts, wellness products, and video and graphic downloads. The revenues of these businesses are reported as Internet and e-commerce revenue on our Condensed Consolidated Statements of Operations. Similarly to our broadcasting segment, our second and fourth quarter advertising revenue generally exceeds our first and third quarter advertising revenue. This seasonal fluctuation in advertising revenue corresponds with quarterly fluctuations in the retail advertising industry. We also experience fluctuations in quarter over quarter comparisons based on the date in which the Easter holiday is observed as this holiday generates a higher volume of video downloads associated with church products. Additionally, we experience increased demand for advertising time and placement during election years for political advertisements.

The primary operating expenses incurred in the ownership and operation of our Internet businesses include: (i) employee salaries, commissions and related employee benefits and taxes, (ii) facility expenses such as rent and utilities,
(iii) marketing and promotional expenses, (iv) royalties, (v) streaming costs and (vi) costs of goods sold associated with Eagle Wellness products.

Publishing Segment

Our acquisition of Regnery Publishing on January 10, 2014, represents a major shift in our publishing segment. Regnery Publishing is a publisher of conservative books that was founded in 1947. Regnery has published dozens of bestselling books by leading conservative authors and personalities, including Ann Coulter, Newt Gingrich, Michelle Malkin, David Limbaugh, Ed Klein, Laura Ingraham, Mark Steyn and Dinesh D'Souza.

Our publishing segment also includes Salem Publishing™, a producer and distributor of Christian and conservative opinion print magazines and Xulon Press™, a print-on-demand self-publishing service for Christian authors.

Publishing revenues include the sale of books, advertising in and subscriptions to our print magazines, and revenues from fees paid by authors in association with the publishing, editing and marketing of their books. Revenues of these entities are reported as


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publishing on our Condensed Consolidated Statements of Operations. Book publishing revenues and cash flows are typically higher in the second and fourth quarter of each year when bigger titles are released. Print magazine revenues are higher in the second and fourth quarter as we publish more titles in those quarters. Similarly to our broadcasting segment, our second and fourth quarter advertising revenue generally exceeds our first and third quarter advertising revenue. This seasonal fluctuation in advertising revenue corresponds with quarterly fluctuations in the retail advertising industry. Additionally, we experience increased demand for advertising placement during election years for political advertisements.

The primary operating expenses incurred by Salem Publishing™ include:
(i) employee salaries, commissions and related employee benefits and taxes,
(ii) facility expenses such as rent and utilities, (iii) marketing and promotional expenses (iv) printing and production costs, including paper costs,
(v) cost of goods sold and (vi) inventory reserves associated with Regnery Publishing.

OVERVIEW

Our radio-broadcasting segment derives revenue primarily from the sale of block programming time and advertising, both at a national and local level.

Our principal sources of broadcast revenue include:

• the sale of block program time, both to national and local program producers;

• the sale of advertising time on our radio stations, both to national and local advertisers;

• the sale of advertising time on our national radio network; and

• revenue derived from radio station sponsored events.

The rates we are able to charge for broadcast time and advertising time are dependent upon several factors, including:

• audience share;

• how well our stations perform for our clients;

• the size of the market;

• the general economic conditions in each market; and

• supply and demand on both a local and national level.

Our principal sources of Internet and e-commerce revenue include:

• the sale of digital advertising;

• the support and promotion to stream third-party content on our websites;

• e-books;

• digital e-mail and newsletter subscriptions;

• product sales and royalties for on-air host materials including editorial publications;

• nutritional product sales; and

• video and graphic downloads.

Our principal sources of publishing revenue include:

• the sale of books;

• subscription fees for our magazines;

• the sale of print magazine advertising; and

• fees from authors for book publishing.

RESULTS OF OPERATIONS

Three months ended June 30, 2014 compared to the three months ended June 30, 2013

The following factors affected our results of operations and cash flows for the three months ended June 30, 2014 as compared to the same period of the prior year:

Equity

• On May 27, 2014, we announced a quarterly distribution in the amount of $0.06 per share on Class A and Class B common stock. The quarterly distribution of $1.5 million was paid on June 30, 2014 to all Class A and Class B common stockholders of record as of June 16, 2014.


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Acquisitions

• On June 6, 2014, we made an early payment of $1.5 million in cash against the $2.5 million deferred payment liability due January 2015 for our acquisition of entities of Eagle Publishing.

• On May 22, 2014, we completed the acquisition of radio station WOCN-AM, Miami, Florida and the related transmitter site for $2.5 million in cash.

• On May 6, 2014, we completed the acquisition of WRTH-FM (formerly WOLT-FM) in Greenville, South Carolina for $1.1 million in cash.

• On April 14, 2014, we completed the acquisition of three FM translators for $0.4 million in cash. The FM translators will serve our Orlando, Florida, Tampa, Florida and Omaha, Nebraska markets.

Net Broadcast Revenue



                                                                 Three Months Ended June 30,
                                       2013         2014       Change $      Change %          2013               2014
                                                  (Dollars in thousands)                       % of Total Net Revenue
Net Broadcast Revenue                $ 47,025     $ 47,855     $     830           1.8 %          78.2 %             69.7 %
Same Station Net Broadcast Revenue   $ 47,025     $ 47,557     $     532           1.1 %

The following table shows the dollar amount and percentage of net broadcast revenue for each broadcast revenue source.

                                            Three Months Ended June 30,
                                           2013                      2014
                                               (Dollars in thousands)
           Block program time:
           National                $ 11,111        23.6 %    $ 11,176        23.4 %
           Local                      7,841        16.7 %       8,267        17.3 %

                                     18,952        40.3 %      19,443        40.7 %
           Advertising:
           National                   3,638         7.7 %       3,752         7.8 %
           Local                     16,230        34.6 %      16,597        34.7 %

                                     19,868        42.3 %      20,349        42.5 %
           Infomercials               1,430         3.0 %       1,059         2.2 %
           Network                    3,805         8.1 %       3,887         8.1 %
           Other                      2,970         6.3 %       3,117         6.5 %

           Net broadcast revenue   $ 47,025       100.0 %    $ 47,855       100.0 %

Block programming revenue increased $0.5 million, of which $0.4 million was generated from local programming on our News Talk, Christian Teaching & Talk and Spanish Christian Teaching & Talk format stations. The increase reflects a greater number of programmers featured on-air with corresponding increases in demand for premium time slots that results in the realization of higher rates.

Advertising revenue increased $0.5 million of which $0.3 million was due to political based advertisements associated with local and congressional elections and $0.2 million was due to higher advertising volume from local advertisers.

Declines in infomercial revenues of $0.4 million reflect our ongoing efforts to rebrand our stations. We continue to promote our stations through local events and speaking engagements that allow us to focus on programming and content consistent with our company values while moving away from infomercials.

The increase in network revenues reflects the increase in compensation received for network programs in select larger markets.

The increase in other revenue of approximately $0.2 million reflects event revenue from attendance and sponsorships of various local events held during this period.

Internet and e-commerce Revenue

Three Months Ended June 30, 2013 2014 Change $ Change % 2013 2014 (Dollars in thousands) % of Total Net Revenue Internet and e-commerce Revenue $ 9,906 $ 14,390 $ 4,484 45.3 % 16.5 % 21.0 %

We continue to acquire and build websites to deliver our content to viewers. On January 10, 2014, we acquired and began operating Eagle Financial Publications, Eagle Wellness and Regnery Publishing, which has an e-book segment, each of which is reported in our Internet and e-commerce segment. During 2013, we acquired Christnotes.org, Godupdates.org and Twitchy.com which we began operating on December 10, 2013. The $4.5 million increase in Internet and e-commerce revenues includes $3.2 million of revenue associated with the Eagle entities and approximately $0.1 million of revenue from Twitchy.com. On all other


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digital platforms, advertising and remnant sales increased $0.7 million based on higher volumes and revenue from video and graphic downloads increased $0.3 million due to the timing of the Easter holiday in the second quarter of 2014 as compared to the first quarter of 2013.

Publishing Revenue

Three Months Ended June 30,
2013 2014 Change $ Change % 2013 2014
(Dollars in thousands) % of Total Net Revenue
Publishing Revenue $ 3,205 $ 6,392 $ 3,187 99.4 % 5.3 % 9.3 %

Our acquisition of Regnery Publishing on January 10, 2014 represents a key opportunity for our publishing segment. Regnery Publishing generated $2.8 million in net book sales, or $4.6 million in gross sales (exclusive of e-books) less estimated sales returns and allowances of $1.8 million during the three month period ending June 30, 2014. Xulon Press, our print-on-demand book publisher, generated an increase of $0.4 million in author submission and marketing fees due to an increase in the number of authors utilizing these services. Declining subscriber levels continue to challenge our print magazines which resulted in a decline in revenue of $0.1 million.

Broadcast Operating Expenses



                                                                   Three Months Ended June 30,
                                        2013         2014        Change $      Change %          2013               2014
                                             (Dollars in thousands)                              % of Total Net Revenue
Broadcast Operating Expenses          $ 30,844     $ 33,910     $    3,066           9.9 %          51.3 %             49.4 %
Same Station Broadcast Operating
Expenses                              $ 30,844     $ 33,498     $    2,654           8.6 %

Broadcast operating expenses reflect higher variable expenses associated with higher revenues, including a $0.9 million increase in advertising and event costs, a $0.8 million increase in personnel-related costs that includes sales commissions, a $0.5 million increase in facility-related costs due to additional locations acquired, a $0.3 million increase in music license fees, a $0.3 million increase in travel costs, including acquisition related site visits and a $0.3 million increase in legal fees.

Internet Operating Expenses

Three Months Ended June 30,
2013 2014 Change $ Change % 2013 2014
(Dollars in thousands) % of Total Net Revenue
Internet Operating Expenses $ 6,887 $ 10,063 $ 3,176 46.1 % 11.5 % 14.7 %

We utilize cost and operational efficiencies where possible by consolidating administrative and technical support, as well as the use of shared facilities and other resources. During 2014, we acquired Eagle Financial Publications, Eagle Wellness and Regnery Publishing, which has an e-book segment, the expenses of which are reported as Internet operating expenses. Increases in Internet operating expenses of $3.2 million include $2.0 million of operating costs incurred by Eagle entities. Across all other digital platforms, we see higher variable expenses consistent with higher revenues, including a $0.5 million increase in personnel and related costs that includes sales commissions, a $0.5 million increase in streaming and hosting expense, a $0.1 million increase in royalties, and a $0.1 million increase in bad debt reserves.

Publishing Operating Expenses

Three Months Ended June 30,
2013 2014 Change $ Change % 2013 2014
(Dollars in thousands) % of Total Net Revenue
Publishing Operating Expenses $ 3,452 $ 6,439 $ 2,987 86.5 % 5.7 % 9.4 %

During 2014, we acquired Regnery Publishing, a book publisher reported within our publishing segment exclusive of e-book operations. We began operating Regnery Publishing on January 10, 2014 and recognized $2.9 million of expenses associated with this entity during the three month period ending June 30, 2014. Xulon Press, our print-on-demand book publisher, incurred higher variable costs associated with revenue growth, including an increase of $0.1 million in personnel-related costs due to an increase in the number of employees and hours worked to meet production demands from the higher revenue volume.

Corporate Expenses

Three Months Ended June 30,
2013 2014 Change $ Change % 2013 2014
(Dollars in thousands) % of Total Net Revenue
Corporate Expenses $ 5,092 $ 5,458 $ 366 7.2 % 8.5 % 8.0 %

Corporate expenses include shared general and administrative services. Increases over the same period of the prior year include $0.1 million of personnel-related costs, $0.1 million of travel and entertainment expenses, and $0.1 million of facility-related costs. These increases in shared general and administrative services are consistent with our acquisition related growth and development.


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Depreciation Expense

Three Months Ended June 30,
2013 2014 Change $ Change % 2013 2014
(Dollars in thousands) % of Total Net Revenue
Depreciation Expense $ 3,102 $ 3,167 $ 65 2.1 % 5.2 % 4.6 %

Depreciation expense is consistent with that of the same period of the prior year.

Amortization Expense

Three Months Ended June 30,
2013 2014 Change $ Change % 2013 2014
(Dollars in thousands) % of Total Net Revenue
Amortization Expense $ 688 $ 1,529 $ 841 122.2 % 1.1 % 2.2 %

Our acquisition activity, including Christnotes.org, Godupdates.org and Twitchy.com in 2013 and Eagle in January 2014 consist of intangible assets such as advertising agreements, customer lists and domain names, with estimated useful lives ranging from one to five years. Amortization expense increases over the life of these assets based on the acquisition date.

Change in the Estimated Fair Value of Contingent Earn-Out Consideration

Three Months Ended June 30,
2013 2014 Change $ Change % 2013 2014
(Dollars in thousands) % of Total Net Revenue
Change in the estimated fair value
of contingent earn-out consideration $ - $ 242 $ 242 100.0 % - % 0.4 %

On December 10, 2013, we recorded an estimate of contingent earn-out consideration payable upon achievement of page view milestones over a two year period related to our acquisition of Twitchy.com. Using a probability-weighted discounted cash flow model, we estimated the fair value of the $1.2 million total contingent earn-out consideration at the present value of $0.6 million as of the closing date. During the three month period ending June 30, 2014, we noted that actual page views were slightly higher than those expected at the time of our original projections. We increased our page view estimates and revised the probability-weighted discounted cash flow model for our updated projections. We recorded a $0.1 million increase in the estimated fair value of the contingent earn-out consideration, which is reflected in our results of operations for the current period. We will review our estimates quarterly over . . .

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